After a moratorium on foreclosures due to the Covid-19 pandemic, foreclosures are now rising. As a result, we can expect to see an increase in the number of REO residential or commercial properties readily available on the marketplace in the coming months.

Whether you're a fairly brand-new real estate agent or one who's been in the business for a while, you probably might utilize a refresher on these bank-owned homes.

Our resident REO professional, Jeff Underwood, shares what real estate agents need to learn about REO residential or commercial properties in Alabama.

What is an REO residential or commercial property?
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Basically, an REO residential or commercial property is real estate that is owned by a bank or lender after stopping working to cost a foreclosure auction. But to truly comprehend REO residential or commercial properties, you initially require to understand the foreclosure process.

The Foreclosure Process

When an with a mortgage stops paying on that mortgage for any reason, the foreclosure process will start. The mortgage contract will consist of language about when the bank can begin this process. Typically, a lending institution won't begin the foreclosure procedure till the customer has missed out on four consecutive payments.

Not all residential or commercial properties that enter the foreclosure procedure are in fact foreclosed upon. Jeff Underwood, managing lawyer at South Oak Title & Closing in Auburn, states, "Oftentimes, the mortgage is reinstated or the lending institution will work out loss mitigation choices to prevent foreclosure. A debtor who applies for Chapter 13 insolvency will also halt the foreclosure procedure."

This process looks different in every state. Underwood explains, "Alabama is a nonjudicial state. This indicates that the bank does not have to file a claim versus the defaulted mortgagor to foreclose. Instead, the bank sends out a series of notifications that informs the mortgagor that they are in default and provides info about reinstatement. Failure to do so will lead to a foreclosure sale." Other states, such as Florida, need loan providers to file a claim versus the mortgagor in state court to foreclose.

In Alabama, notices about the upcoming foreclosure sale are also released in the county paper for 3 weeks. If the bank or lender is the high-bidder or only buyer at the foreclosure sale, this residential or commercial property ends up being "real estate owned", or an REO residential or commercial property.

Selling an REO residential or commercial property

Jeff Underwood says, "Lenders aren't in the company of retaining these residential or commercial properties. Their goal is to offer the home and recover their losses from the foreclosure. After the foreclosure sale, the residential or commercial property will go on the market as an REO residential or commercial property." The loan provider sends a recommendation for this residential or commercial property to both a real estate brokerage and a title company.

Listing Process for REO residential or commercial properties
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Listing an REO residential or commercial property for sale is really similar to noting any other residential or commercial property, with a few key differences. There's still an indication in the lawn, a listing on the MLS, and photos of the residential or commercial property. The broker's objective is to find a purchaser for the residential or commercial property. But instead of a specific customer, the broker represents a loan provider. On the MLS, this residential or commercial property will be designated as bank-owned.

Underwood says, "These residential or commercial properties might not look like a typical home that's market-ready. We had one REO residential or commercial property where the previous owner took everything out of the house, consisting of sinks and banisters. The bank will hire a business to clean things up and ensure things are working, but purchasers will not find a staged, upgraded home."

Lenders want to offer REO residential or commercial properties for fair market price as rapidly as possible, so pricing is figured out by getting a BPO, or broker price opinion. Two real estate agents will provide their viewpoint on the marketplace price of the residential or commercial property, and then these opinions are averaged to obtain the market price. If the residential or commercial property languishes on the market, the bank will start dropping the price in incremental portions to find a buyer.

Title Process for REO residential or commercial properties

When the title business receives the recommendation for an REO residential or commercial property, they will start a title search, just as they would for any other residential or commercial property. "We do this before the residential or commercial property is listed for sale, and just like any title search and exam, we're trying to find any prospective concerns so that we can provide a clear title to the buyer," Underwood describes.

If the title is clear, this file is ready for when the residential or commercial property goes under agreement. If there are issues that require to be dealt with such as judgments, encumbrances, or liens, the title company will clear the title so that it's prepared for a future purchaser. Once the residential or commercial property goes under agreement, all that's needed is an update to title.

Common Title Issues with REO Properties

Several typical title problems can emerge with REO residential or commercial properties. Tax redemption problems are especially typical. In Alabama, taxes are paid in financial obligations. If they're not paid by December 31, they're subject to penalties and interest. If taxes are still overdue by April, the county will have a tax sale in May. Most of the times, the county is the high bidder. But in other cases, a 3rd party will buy the tax certificate.

Underwood states, "If the county owns the tax certificate, fixing this is a pretty simple procedure. But if it's owned by a 3rd celebration, it can get complicated." To redeem from a specific, a bank is needed to pay the delinquent taxes, penalty, interest, along with the value of any improvements on the residential or commercial property. In some scenarios, there can be a prolonged settlement process to eliminate this tax lien.

Encroachment concerns are likewise typical with REO residential or commercial properties. Residential or commercial property lines aren't constantly plainly marked, which is why surveys are an essential part of the title search and examination. Underwood explains, "An encroachment is any structure that exists on a next-door neighbor's land or residential or commercial property - a fence, a shed, a mobile home, or perhaps part of a house or barn." It can be complicated to clear these concerns and in some cases, a quitclaim deed may be required.

And as with any other residential or commercial property, we can find any number of other title issues. Missing deeds, deeds in the back chain of title that do not have marital status, and other encumbrances can likewise be discovered during the title search and examination. Title companies experienced with REO residential or commercial properties know exactly which concerns to look for and how to resolve them to present REO purchasers with a clear title.

Owner's title insurance coverage protects homebuyers from concealed dangers to their title after purchase. An improved owner's policy may be advised for individuals who acquire an REO residential or commercial property. But regardless of the policy, REO residential or commercial property purchasers need to always understand laws worrying the right of redemption.

Right of Redemption Laws

Individuals, including the foreclosed debtor or beneficiaries of the debtor, can redeem or buy back a foreclosed residential or commercial property for as much as a year after the foreclosure sale. Underwood describes, "To redeem a foreclosed residential or commercial property, the redeeming celebration should pay the amount of the foreclosure quote, interest, and other charges including taxes, insurance coverage, and repair work."

"Because foreclosure sales can happen reasonably rapidly in Alabama, the redemption period is longer than in most states. For mortgages came from before 2016, that redemption duration is a year. For mortgages originated after January 1, 2016, the redemption duration is shortened to 180 days."

He continues, "Redemptions of foreclosed homes are very unusual, but anyone purchasing an REO residential or commercial property needs to deal with an attorney who understands and comprehends the law." These laws differ from one state to another and can alter, so always consult your closing attorney with specific questions about the right of redemption.

Buyers acquiring an REO residential or commercial property before the redemption period expires requirement to be mindful that owner's title insurance will never ever offer affirmative coverage over the right of redemption. For money purchasers, this will be listed as an exception in Schedule B-2 of the owner's title insurance coverage policy for the duration of the redemption period.

Lenders supplying financing for REO purchases will usually need affirmative protection for the remaining redemption duration. Options, such as a bond, exist if the loan amount depends on 30% higher than the foreclosure bid, however purchasers ought to comprehend that affirmative coverage for the staying redemption period just secures the loan provider.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures was in place until November 2021. As this moratorium has lifted, lending institutions have carried out loss mitigation treatments to keep people in their mortgages and help them retain their residential or commercial properties. However, if loss mitigation methods are unsuccessful, the foreclosure procedure begins.

Underwood says, "Foreclosure starts are up 39% over the last quarter, and we're anticipating to see a boost in these as the year advances. Starting in the 3rd quarter of this year, we'll begin to see a higher-than-normal percentage of REO residential or commercial properties on the marketplace. It won't resemble it remained in 2008, but it will certainly be more than what we're utilized to seeing."

There's no requirement for real estate agents to be intimidated by REO residential or commercial properties. As more of these residential or commercial properties appear in the MLS, real estate agents who understand the nuance of purchasing a bank-owned home are better equipped to serve their clients.

At South Oak Title and Closing, we like partnering with real estate agents to help them better serve their clients. Whether you have particular concerns about dealing with REO residential or commercial properties or simply require an REO professional in your corner, we're here for you. Contact us with your concerns today.

Jeff Underwood

Jeff is a Birmingham native and graduate of the Birmingham School of Law. He has invested decades dealing with banks, lending institutions, and REO residential or commercial properties through his time leading the REO division at a Birmingham law office. Jeff is wed and has 2 children: one recent graduate and one existing student at Auburn University.

Jeff Underwood is the Managing Attorney at South Oak Title & Closing in Auburn.

This article is meant to supply basic details about REO residential or commercial properties in Alabama and need to not be considered legal suggestions. Laws worrying REO residential or commercial properties also differ from state to state. Please consult your regional attorney with concerns.